2018-01-10 00:00:002018-01-10 00:00:00https://quickbooks.intuit.com/ca/resources/pro-accounting/manage-professional-liability-risksPro AccountingEnglishLearn some commonsense strategies for limiting risk among accountants and accounting firms, and for staying out of court when there's a...https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2018/01/Accountant-Document-Meeting-With-Client-To-Minimize-Professional-Liability-Risks.jpghttps://quickbooks.intuit.com/ca/resources/pro-accounting/manage-professional-liability-risks/Things to Consider When Managing Professional Liability Risks

Things to Consider When Managing Professional Liability Risks

Accountants, like any other professionals, take on a lot of responsibility in their work. Clients trust you to handle their money, and if you make an avoidable mistake, you can cause serious harm. Maybe worse, from your firm’s point of view, the resulting lawsuit could put you out of business. This unfortunate reality makes it essential that you learn to manage the risk of providing advice and assurance services, and filing clients’ taxes. By following best practices for accounting professionals in Canada, and by acting to cover yourself professionally, you not only reduce the risk something will go wrong but also ensure the consequences are manageable.

Follow the Rules

The first way to mitigate risk is to follow the rules. You’ve probably already heard of Chartered Professional Accountants of Canada, which sets standards and practices for Canadian accountants. Its rules are set to harmonize with international accounting standards set by the International Ethics Standards Board for Accountants. This body tries to set robust standards for avoiding conflicts of interest, violations of the law, and the appearance of impropriety.

Most of its rules are commonsense stuff. Rule 204, for example, demands that accountants providing assurance services should not have financial or other interests tied up in the target client (or its competition). Say your firm has an interest in a Saskatchewan realtor. Then, you get called in for an assurance engagement on a realty company in Regina. There’s a possible conflict here, and Rule 204 encourages you to either turn the job down, divest from the investment, or at least disclose the interest to all relevant parties. Failure to do so may result in a lawsuit against your firm, as well as other, government-imposed penalties.

Set Clear Expectations

A lot of the perceived conflicts in accounting results from nothing more than a misunderstanding. This almost always happens because parties to an engagement were less than crystal clear about their expectations up front. This is most likely to happen to your firm when you’re dealing with private individuals, rather than corporate clients. And that usually comes down to the lack of an engagement letter. While most accountants prepare an engagement letter for their corporate clients, they often neglect to consider the need for one with their private individual clients. And those individual clients can be all over the map. Meaning that, without an engagement letter, you never know what the person sitting on the other side of your desk really understands and what mistaken impressions you’ve left until it’s too late.

Say you’ve been hired by a woman whose husband has unexpectedly passed away. His books are a mess, and nobody knows how the estate should be distributed. You come in to establish the deceased’s assets and liabilities, and to help the executor get a handle on what he’s working with. You deliver your report and you collect your fee. Six months later, there’s an ethics complaint and a lawsuit against you by the widow, who was under the mistaken impression you were also going to help file tax returns for her, rather than just report on the estate. Without a solid engagement letter to back you up, you might be in trouble.

In this case, the misunderstanding may have been the client’s fault, but it could have been avoided during the initial consultation. If you had made sure she understood and signed an engagement letter, then all this trouble might have been avoided. This potential situation—and the need for an engagement letter—probably applies to almost any work you do for your clients.

Document Everything

Speaking of printing things, there’s no downside to documenting every interaction you have with a client. You never know when a brief email from two years ago will come in handy, and keeping those records costs basically nothing. Imagine you have a law firm as a compilation client. After several years, you find out your client has been disbarred for dipping into his trust account for his own firm’s use. He may not be a bad guy, but he tells investigators you signed off on all his accounts and he thought what he did was okay. Now, you might be in trouble for not making clear you were unaware of a client’s malfeasance.

If you’ve kept good records, this can be resolved in an afternoon by forwarding copies of the relevant documentation to investigators. Emails and PDFs of past correspondence would show you were totally in the dark about what he was doing, or even that he misled you, and you should be fine. Without the record, it’s your word against his, and that can be risky.

Stay Out of Court

If something comes up that can’t be so easily resolved, at least try to stay out of court. Lawsuits are expensive, and putting an arbitration clause in your contracts could save you a lot of time and money in the long run. Settlements in arbitration are also generally lower than judgments imposed by the court, and if arbitration is your first stop in resolving a dispute, the whole mess is likely to be over in months, rather than years, which is typical of a lawsuit.

Can’t Have Too Much Insurance

Professional insurance can be your salvation in any kind of a claim. Professional liability insurance for accountants is a must, and it is generally mandated for all professional accountants providing services to their clients. But you should also consider the amount that you carry and ensure that it is consistent with the size of your client portfolio. If, for instance, a client argues your advice has cost it a million dollars, your minimally mandated professional insurance may not cover the claim. And because you never know what a jury will decide, carrying a $1 million policy might save your firm.

Mitigating risk is as important for accountants as for doctors. By avoiding conflicts, communicating clearly, and heavily insuring your practice, you can keep the risk to a minimum and limit the damage from a professional mishap.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.